During the second week since the Financial Accounting Standards Board released its Exposure Draft on amendments to FAS 140, the chatter has shifted from ABCP/CDOs to the impact the new rules may have on the broader term market - namely credit card master trust structures, dealer floorplan structures and other MTs with revolving components that had previously enjoyed QSPE and, thus, off-balance sheet status.
A primary area needing clarification in the new draft - and one of the key concerns for the market - involves the definition of "reissuing" beneficial interests, and whether or not subsequent series from a master trust (set up as a QSPE) will be considered reissuance.
During a conference call last week hosted by Credit Suisse First Boston, Michael Mittleman of the ABS credit card group argued that subsequent trust series should not fall into FASB's categorization of reissuance, especially if they are properly isolated. During the discussion, speakers seemed to draw a distinction between isolated series - which pay down by the cash flows of the assets - and series that are paid down by the issuance of subsequent notes. There may be an argument that the former should not be considered reissuance, speakers said.
"If there's subsequent series being issued resulting in [prior] notes being paid down, than you potentially have something that could be described as a reissuance," said Michael Hall, of KPMG, the primary guest speaker on CSFB's call.
This new "can of worms" threatens to put several tens of billions of dollars worth of credit card ABS onto the balance sheets of issuers, who, in many cases, are monoline credit card banks. The change in their capital, leverage and asset ratios could be quite substantial, versus the struggles that the investment banks face in potentially bringing their conduit assets back onto their balance sheets, market sources said.
Vernon Wright of MBNA America Bank , one of the largest monoline credit card issuers, shares Mittleman's view that card master trusts do not "reissue" when new series are brought to market, but that additional series are stand-alone, new issuances.
"The cash from the series that are sold come to the transferor and not to the trust," Wright said. "Whereas in a CP issuance, the source of repayment for the existing CP holders is the issuance of new CP. (In a credit card series), the repayment is instead coming from the assets in the trust."
Regardless, there is likely to be some level of restructuring on the term side to fully adhere to FASB's final rules, however they turn out. For one, certain credit card master trusts have the ability to issue short-term paper directly into the ABCP market. For these to remain QSPEs, they could lose that capability.
The [proposed] new order
Beyond tightening the criteria for what can and can't be held by a QSPE, FASB's proposed amendment has a few major claws to it, one dealing with liquidity lines, credit enhancement, and which parties are permitted to provide it. Anything outside of holding a subordinated interest in a trust is off-limits for a transferor, its agents or affiliates, should the SPE be seeking Q status. None of these parties may provide credit enhancement, liquidity, or be in anyway contractually obligated to pledge cash to the SPE or the beneficial interest holders. This includes any sort of derivative arrangement, including interest rate swaps.
Further, if the SPE is able to reissue beneficial interests, control of the transferor over the reissuance of BIs becomes an issue, which could impact single-seller ABCP conduits currently structured as Qs, where the transferor is also the program administrator. If the transferor is also providing a liquidity facility, forget about it.
Also, if the SPE can reissue, no one party can provide more than 50% of the liquidity support to an SPE for it to be a Q. If a party is able to control the reissuance of BIs from an SPE, that party cannot also be providing any of the liquidity support or credit enhancements (i.e., administrators cannot provide liquidity support if the conduit aims to satisfy the Q criteria)
As mentioned, some credit card MTs have a short-term issuing component similar to an ABCP conduit, which repays by reissuing, a condition more difficult to argue is isolated from previous issues. Furthermore, it might be difficult to argue that MTs with the ability to reallocate excess interest across series are not reissuances, versus series that are isolated from one another. The ability to decide how to redistribute excess spread also brings about control issues.
On the CSFB call, the credit card discussion briefly covered the notion that clean-up calls - a feature found in most ABS and MBS structures that allows the servicer, which is often the transferor, to repurchase the receivables when they fall below a certain threshold (typically 5% to 10%) - may violate the "no put option" criteria. Included in the proposed amendments are any arrangements where a transferor is contractually obligated to deliver additional cash to the trust.
KPMG's Hall does not believe it was the FASB's intention to include clean-up calls in the scope of its rules.
There are a host of other proposed rules that can potentially call for restructuring of certain transactions, sources said. For example, FASB introduces some puzzling language on two-step transfers - typically the process of an SPE subsidiary, which purchases the assets from the transferor, selling an interest in those assets to the note-issuing vehicle, to achieve "isolation." Per FASB's Exposure Draft, the second SPE must satisfy QSPE requirements for the transferor to retain the right to "pledge or exchange the transferred assets." It's understood that this view - when digested by the accountants - will have an impact on sellers in multi-seller conduits.
Just plugging-up some holes
The Exposure Draft is out for commentary until July 31. The deadline for FIN 46 restructuring is next Monday (7/1).
As noted last week in ASR, one of the premises behind "fast-tracking" a set of amendments to 140 was that FASB wanted to limit a so-called Q loophole in its FIN 46 consolidation guidelines (see ASR 6/16), sources said. More simply put, for structures like commercial paper conduits, FASB apparently intended to make the Q exemption a non-option (many securities arbitrage and single-seller conduits were structured using QSPEs prior to the release of FIN 46 in January).
What's interesting is that the conduit market, which was bearing the brunt of the new FIN 46 guidelines, had pretty much written off the QSPE exemption, anticipating a tightening of the rules as FASB picked up the former EITF 02-12 - which addressed the permitted activities of QSPEs issuing beneficial interests - from the Emerging Issues Task Force shortly after the release of FIN 46.
It is understood that, for public companies, adoption of FASB's finalized amendments will take place in the quarter immediately following this final issuance. Hall, who was expressing his own opinion and not necessarily KPMG's, believes the final amendments will be issued in the fourth quarter 2003 and adopted in the first quarter of next year.
Since the issuance of the Exposure Draft, there have been several research pieces released, including a sum-up with a flow chart from Deloitte & Touche called How Do You Q?, and research from various banks, including a piece titled Is FASB trying to kill QSPEs? from Banc One Capital Markets.